Credit availability key piece of truck sales puzzle

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More restricted access to credit alongside higher sticker prices for post-2010 emission-compliant trucks are two key reasons behind the long slide in Class 8 orders that’s occurred from February through June of this year, according to several industry experts. Placed alongside a slowdown in freight volumes and a broader slump in the U.S. economy means it could take awhile for orders to regain their previous momentum.

“As you know, freight demand drives capacity changes, but also drives rates, utilization, profits and financing,” Jay Thompson, president and GM of Transportation Business Associates (TBA), told Fleet Owner. “We have suggested that the latter is driving the numbers – i.e. well-financed or good credit large players have gotten their fleets up to date while the rest of the market bought what they could get financed.”

Thompson said smaller trucking operators are getting financed only at half the volume compared to previous years, which has restricted Class 8 orders and sales to a largely unnoticed degree.

“In other words, the people with good credit or rich parent companies have overbought over the last couple years versus history – making the overall [order and sales] numbers look good while the rest of the market couldn’t make up the difference,” he explained. “With the good trade values of used trucks, [smaller] operators would update more if they could get financed. [But] the banking financing packages have changed to meet their new world.”

The group’s survey also found a third of small businesses had their existing credit slashed and one in ten had their loans called in early over the same time period, with 60% noting that changes in their credit occurred due to their bank's internal risk assessment.

That perception of “credit contraction” is occurring at a time when the transportation sector as a whole is seeking more financing to purchase equipment. According to GE Capital America’s quarterly CFO survey, transportation leads all industries considering financing for equipment (69%) over the next 12 months.

TBA’s Thompson noted that in trucking, half of the market has reduced financing available and thus he sees them running at “half throttle” – getting about half the financing that they did previously – for some time to come. “We see little change in that sector,” he noted.

Jonathan Starks, director of transportation analysis for FTR Associates, pointed out that while truckers in general “are operating in a modestly positive environment, it’s not strong enough to elicit higher demand for expensive new vehicles,” adding that growth in freight volumes and rates slowed noticeably during late 2011 and into 2012.

Starks noted that preliminary data showed June Class 8 truck net orders at 16,195 units – 8% lower than May, 23% lower than the same month last year, and the lowest month for orders since September 2010. For the three-month period including June, Class 8 orders translate into annual demand of 202,700 units – well below the roughly 250,000 units built last year and the 261,000 units originally projected to be built in 2012.

“Comparing that to our overall 10-year populations plus a relatively flat freight market, we see a flat projection,” added TBA’s Thompson. “We are also seeing the new average norm truck life stretching out – trucks are better than ever – and therefore many are adjusting that truck population basis out more.”

“The explanation for the soft patch remains of the ‘death by a thousand cuts’ variety,” noted Kenny Vieth, president and senior analyst for ACT Research. “As has been the case since late February/early March, the issue appears to boil down to credit-buying truckers’ confidence in the economy relative to the risk of taking out a sizeable loan to buy a truck. To that end, risk, economic or political, domestic or global, remains high, and memories of 2009 are still fresh.”

However, Anthony Sasso, TD Bank’s head of equipment leasing & finance, noted in an interview with Fleet Owner that this pullback in truck purchasing doesn’t mean underlying “replacement demand” is diminishing. Indeed, according to broad economic survey TD Bank conducted a month ago, American corporations continue to significantly “under invest” in equipment assets relative to its availability of funds.

“I wouldn’t say the need for capital investment in equipment is diminishing,” Sasso explained. “The momentum for reinvestment, certainly in trucking, is still there largely in terms of the need to replace older equipment.”

TD Bank’s research determined that the sub-2% rate of capital investment growth in the first quarter of this year in is not consistent corporate balance sheet fundamentals. According to its report, corporate profits make up 10% of GDP, nearly double the pre-recession average, while the ratio of current assets to short term liabilities—a common measure of liquidity—has risen to levels not seen since the 1950s.

As a result, a substantial gap has emerged between cash-on-hand and equipment investment, noted Beata Caranci, vp and deputy chief economist for TD Bank’s TD Economics affiliate. “The severe pullback in investment during the recession caused the nation’s stock of equipment and software to shrink in real terms for the first time since World War Two [and] there is evidence that the process of rebuilding that stock is not yet complete,” he said.

While this should help drive investment growth going forward, Caranci does caution that “investment intentions are sensitive to shocks. An unruly resolution to Europe’s debt crisis would likely delay or mute intentions to rebuild the stock of equipment and software. If Europe’s crisis intensifies or if the U.S. slips, businesses may opt to keep a tight lid on investment for the time being.”

Sasso added that, where trucking is concerned, “asset reinvestment” in fleet equipment is not limited to just for-hire carriers. “This is an asset class that cuts across many sectors: food and beverage companies, such as Coca Cola, are a good example,” he said. “Good momentum remains for reinvestment in such sectors.”

The real decision now among such companies is whether to lease or buy such equipment and that depends on what they want to do in regards to their balance sheets, Sasso noted. “In the middle market particularly we’ve seen much more demand for leasing and financing,” he said. “The way I look at it, I see favorable metrics and improvement in credit approval levels. That will be good for borrowers.”

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